Cory Booker’s ‘Baby Bonds’ Wouldn’t Support a Savings Culture — It’s Just More Government Subsidies

To the extent bipartisan policy reform is possible, ideas must
appeal to the instincts of both conservatives and liberal
progressives.

In that tradition, Sen. Cory Booker’s proposal for ‘baby bonds’ may be
a stroke of political genius. Founding special accounts for newborn
children with a taxpayer-funded deposit, and means-tested
government additions through childhood, has obvious appeal to
liberals. It redistributes money and reduces measured wealth
inequality.

But Booker is no doubt hoping it can pique conservative interest
too. The so-called American Opportunity Accounts, on the face of
it, introduce children to the concept of saving and support
families, while providing young people with a nest egg to become
more self-sufficient in achieving major life goals.

Booker’s idea is this: When an eligible child is born, an
account would be opened with a $1,000 deposit from the taxpayer.
Each year until the child turns 18, the government would deposit a
means-tested sum rising to a maximum $2,000 contribution. The funds
in these accounts would generate returns free of tax but could not
be withdrawn until the child turns 18. After that point, the money
could be accessed but only be used for specified investments, such
as down payments on a house, college tuition, professional
training, or retirement savings. The eventual sums could be
significant, with a maximum of nearly $50,000 for someone in
receipt of the highest annual contribution and returns of 3 percent
per year.

There’s a crucial difference though between this proposal and
child trust funds that have been previously tried in countries such
as the United Kingdom. Under Booker’s plan, families would be
prohibited from adding to government contributions with their own
private funds. In the U.K., the government merely opened the
accounts and administered two small payments at birth and at age 7.
But the bigger idea was that parents and grandparents would scurry
up to $1,000 more away each year, on top of the government
deposits, valuing the tax advantages and the self-discipline of
being unable to draw down the funds.

Booker’s proposal is entirely different. Being solely a public
scheme, it amounts to pure redistribution — transfers from
taxpayers to those on low incomes. As such, it has little to offer
conservatives. The argument it will encourage saving or show
children the power of investment is bogus. Saving is about
deferring consumption — sacrificing today to fulfill other
goals tomorrow. But this is pure taxpayer support: taxing or
borrowing to take from Peter to pay Paul, with no sacrifice on the
part of those enjoying the rewards.

It’s actually worse than that. Precisely because it
amounts to pure redistribution, Booker would naturally impose
conditions on what the funds could be used for. He recognizes,
correctly, that taxpayers would be loath to grant young adults a
huge lump sum at age 18 to blow on a fast car or an
around-the-world travel excursion. Yet by restricting what the
“savings” from the accounts can be used for, the
program really amounts to just a backdoor subsidy for home-buying,
college tuition, or retirement.

It would be one thing if such a one-time coming of age transfer
replaced existing means-testing federal support elsewhere. But that
is not what this is about. It is really just a whole new
entitlement — an elaborate scheme, with a raft of new
bureaucracy, which masks its effect: pumping $100 billion per year toward the same
old usual liberal ambitions.

As my colleague Chris Edwards and I documented in a report last
year, low-income people really do often have little to no
savings. Conservatives should care about their financial security.
But rather than support Booker’s phony savings scheme, which
will do nothing to change behaviors, conservatives should instead
push for Universal Savings Accounts — innovations that have
been extraordinarily successful in encouraging modest savings for
those on low incomes in Britain and Canada.

These accounts allow people to deposit after-tax income, which
then grows tax-free, much like supercharged Roth IRAs. Crucially,
they can be used for any purpose and funds withdrawn at any time.
That flexibility overcomes one of the main reasons that poorer
families do not save in tax-advantaged schemes: the fear they will
not be able to access funds for unforeseen contingencies.

The best way to give people experience of savings and investment
is to remove risk barriers that currently prevent them from saving
formally. Booker’s scheme operates under the veneer of
encouraging frugality. But it really just amounts to expanding
federal government subsidies through the back-door.